Turkey's central bank raised its end-2023 inflation forecast sharply to 58.0%, its new governor, Hafize Gaye Erkan, said on Thursday in her first news conference, vowing to continue gradual monetary tightening.
The bank's year-end forecast in its previous inflation report three months ago was 22.3%.
Speaking in Ankara, Erkan told the news conference that the bank's inflation forecast for end-2025 was 15% and that it would continue to raise interest rates, as it has done in the last two months, alongside quantitative tightening.
"Until a significant improvement in the inflation outlook is achieved, we will gradually strengthen monetary tightening as and when necessary," said Erkan, a former Wall Street banker who was appointed on June 9.
The biggest contribution to the sharp rise in the 2023 forecast came from forecasts deviations and a change in forecasting approach.
Erkan said the exchange rate of the lira, which has weakened sharply this year, pushing import prices higher, was also a main factor in the upward revision, with the end-2024 inflation prediction raised to 33% from 8.8%.
The central bank has hiked its policy rate (TRINT=ECI) by 900 basis points to 17.5% in the two meetings under Erkan, but the pace of tightening has remained below market expectations.
The bank has also begun to simplify macroprudential measures implemented under the former governor and has supported the rate hikes with qualitative and selective credit tightening.
"We also sterilize liquidity through quantitative tightening, thereby enhancing the effect of rate hikes... We are making the gradual and steady rate hikes more holistic and stronger through quantitative tightening and selective credit tightening," Erkan said.
Is Portfoy executive vice president Nilufer Sezgin said the central bank's forecasts were in line with market expectations, unlike in previous years when there were "serious differences".
"The central bank did not only provide an inflation forecast that is in line with economists predictions but... the emphasis in the report very much matched those of the market. We had not seen this from the central bank in many years. This is an important and positive change," she said.
Annual inflation fell to 38.21% in June, having peaked at a 24-year high of 85.5% in October last year but economists have revised their year-end forecasts to as high as 60%.
The lira traded at 26.9560 after the news conference, unchanged from the level beforehand. It has weakened 30% so far this year.
CENTRAL BANK INDEPENDENCE
Economists expect the policy rate to rise further to 25% by year-end, still leaving real rates negative. They warn that Erdogan's influence over the central bank limits how far it can go in tightening policy.
Asked if the bank was independent in taking interest rate decisions and the pace of tightening, Erkan said the monetary tightening process should be looked at as a whole.
"In the abundance of (macroprudential) regulations that are damaging pricing behaviour and changing banking dynamics, following a holistic optimisation is the most prudent and correct method," she said.
"Defining interest rate hikes as sufficient or insufficient can only be done after inspecting the intricacies of this holistic approach," she said.
Under former Governor Sahap Kavcioglu, the central bank slashed its policy rate to 8.5% from 19% in 2021, based on Erdogan's economic programme. The cuts sparked a currency crisis and the lira weakened 44% in 2021 in addition to another 30% in 2022, stoking inflation.
Erdogan changed policies after election, which led to the rate hikes and helped the central bank build back its international reserves, which it had used in previous years to support the lira.
